Here's How The Global Sentiment Shift Is Playing Out In Currency

The latest Commitment of Traders reports covers the week through April 17. It shows that the net short positions in the euro, yen and sterling futures grew, while the net long Canadian and Australian dollar and Mexican peso futures positions were trimmed.

There does appear to have been a shift in market sentiment as the second quarter gets under way. The European debt crisis is threatening to re-emerge and Spanish credit default swaps made a new high at the end of last week. European bank shares appear to be leading the correction of European equities.

While the real test of the underlying improvement in the US labor market is still to come (in the coming months, the seasonal adjustment increasingly becomes a head wind, and weekly initial jobless claims are stabilizing), the US cyclical expansion is continuing and the world's largest economy is set to post the strongest growth among the high income countries.

The episodic increase in the European crisis and the relative out performance of the US economy underpins dollar sentiment and this has been reflected in the general net short euro positions that have been maintained since last September. It was essentially cut in half in Feb-March period, but the latest CFTC data may mark the beginning of the re-building of net short euro positions.

Euro: The net short speculative position swelled to by about 32k contracts to 101.4k. This is the largest in about a month. A small number of longs (almost 600 contracts) capitulated, while 21.3k contracts joined the shorts, which now stood at 140.6k as of April 17th. What the commonly cited net figures do not capture is when the short-covering rally began, the speculator short euro futures position peaked near 203k.Japanese yen: The net short yen futures positions increased by 1k contracts to 66.1k. Both longs and shorts among the non-commercial market segment (which is understood to be speculators) were increased: 1.5k and 2.5k respectively. By looking at the net position, one misses that the absolute short position is the largest in a month.

The yen has appreciated by almost 4.5% against the dollar since mid-March and yet the yen bears have not capitulated. They may be trying to hold on until the BOJ meeting on April 26-27. The yen bears may be placing too much significance on the possibility of new asset purchases by the BOJ (QE). While the Feb 14 decision to increase asset purchases by JPY10 trillion did help weaken the yen, but thee are other considerations. Then it was a surprise. The speculative positioning in the futures market were long yen. The euro debt crisis was in a low ebb.

British pound: The net short speculative position rose by about 10k contracts to 18.8k. Ironically both long and shorts added to positions. Longs rose by a little more than 500 contracts, while the short positions grew by 10.5k contracts. At 48.6k short contracts, the speculative short position is the largest in a month.

Swiss franc: The Swiss franc is an exception to the growth of net short foreign currency futures positions among the majors. The net short franc position was reduced to 9.9k from 14.7k. Short positions were shaved by less than 100 contracts but now stand at their lowest level in 2 months. Fewer players want to bet with the SNB apparently. The long positions fell by 4.8k contracts, which is the smallest since the start of the year.

Canadian dollar: The net long speculative Canadian dollar position was trimmed to by about 1.5k contracts to 28k. Both long and short got out by roughly the same amount 9.3k and 7.8 contracts respectively. The net position does not allow one to appreciate the extent of the decline in participation by speculators recently. The absolute long positions is the smallest in two months and that absolute short position is the smallest since last August.

Australian dollar: The net Australian long positions fell by 10k contracts and is the smallest of the year, thus far. Longs were trimmed by about 6.2k contracts, but at 79.8k is still substantial. The shorts (top pickers?) grew by 3.7k contracts to 40.4k.

Mexican peso: The net long speculative peso position fell 14.2k to 68.6k contracts. Some 7.1k long positions were cut, throwing in the towel as the dollar headed to and then beyond the MXN13.00 level in the spot market. There remained 84.6k contracts long the peso. Shorts (bottom pickers, maybe momentum players) doubled the absolute short peso position to 16k contracts.